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www.targetgroup.com Risk & Compliance Bulletin April 2019 | 1

April 2019

The FCA and PRA held its first forum on Climate Financial Risk. The purpose of the forum is to help firms understand climate change and its impact on firms risk and control frameworks. The FCA’s on-going work in this area will address its objective to serve the public interest and ensure that the industry is able to adapt as our economies and individual needs evolve to accommodate climate change.

The FCA has submitted its final recommendations to the Treasury for the retained provisions of the Consumer Credit Act (CCA). The review considers whether any of the remaining provisions could be replaced by FCA rules and guidance without adversely affecting the appropriate degree of protection for consumers. In its interim report, the FCA suggests potential changes to the regulatory approach of some CCA provisions over concerns that some of the protections afforded to consumers may be disproportionate. It is now up to the Treasury to review the FCA’s analysis and decide how to proceed.

The FCA has published the final report of its mortgage market study following a two year review into how the market is performing for consumers. Alongside this report, the FCA is also consulting on changes to its responsible lending rules and guidance aimed at helping ‘mortgage prisoners’. Whilst this initiative has been launched to support this particular subsection of borrowers, the guidance can apply to any eligible borrower who is looking to switch to a more affordable mortgage without borrowing more.

This month, the Treasury has published a final report on the threat of economic crime in the UK which is estimated as being in the tens of billions of pounds each year. The report proposes several direct actions for the government to consider aimed at strengthening the UK’s anti-money laundering framework. It is felt that given the UK’s imminent exit from the EU, trading with third countries is likely to increase, which could expose the UK’s financial system to further illicit activity.

Happy reading!

Risk&ComplianceWhat’s Inside... • FCA issues final rules on the new directory

• FCA report setting out industry insights on cyber security

• FCA publishes Mortgage Market Study final report

BULLETIN

This month the FCA has finalised its guidance setting out how firms can clearly define their Senior Managers responsibilities under the Senior Managers and Certification Regime (SM&CR). The extension of SM&CR to all solo-regulated firms will continue to draw industry and regulatory attention over the coming year as it represents a real commitment throughout the financial sector to encourage a positive staff culture at all levels and reinforce individual responsibility.

Foreword by

TERRY BAXTER

Target Group Director of Risk and Compliance


This Month’s Headlines

General

• FCA finalises guidance on SM&CR statements of responsibilities and responsibilities maps for solo-regulated firms

• FCA issues final rules on the new directory

• FCA policy statement on increasing the Financial Ombudsman Service award limit

• FCA report setting out industry insights on cyber security

• Financial Ombudsman Service correspondence to the Treasury on the treatment of vulnerable customers under the Equality Act 2010

• Findings of phase I of the FCA's digital regulatory reporting pilot

• First meeting of FCA and Prudential Regulation Authority Climate Financial Risk Forum

• UK Finance online guide to ethics in banking and finance

Consumer Credit

• FCA review of the retained provisions of the Consumer Credit Act

• FCA thematic review of the debt management sector

• FCA letter to firms following a review into credit card fees and charges

Mortgages

• FCA publishes Mortgage Market Study final report

• FCA consults on changes to its responsible lending rules and guidance

Investments

• FCA publishes the investment platforms market study final report alongside a consultation on remedies

Financial Crime

• Treasury Committee report on Economic Crime: Anti-money laundering supervision and sanctions implementation

• Treasury issues guidance on Counter-Terrorism (Sanctions) (EU Exit) Regulations

Enforcement

There are no material updates this month

Dates for the diary

Terms & Conditions Of Use

Target Servicing Ltd accepts no responsibility for any loss or damage of whatever nature arising in any way out of the use of, or inability to use, this bulletin or from any error or omission in information contained in this bulletin


General

1.1

FCA finalises guidance on SM&CR statements of responsibilities and responsibilities maps for solo-regulated firms

The FCA has finalised guidance which aims to help firms clearly set out Senior Managers’ responsibilities through Statements of Responsibilities (SoRs) and responsibilities maps as part of the Senior Managers and Certification Regime (SM&CR). SM&CR will be extended to all FCA solo-regulated firms from 9 December 2019. For enhanced regime firms, SoRs are comprised of three subsections and the guidance provides some questions for firms to ask themselves when preparing their statements:

Prescribed Responsibilities This section should be used to confirm who is responsible for applicable Senior Management Functions as defined in chapter 24 (Senior Management Arrangements, Systems and Controls) of the FCA Handbook. Firms should consider whether the responsibility being allocated is appropriate to the Senior Manager’s role.

Overall ResponsibilitiesThis applies to a firms regulated and unregulated financial services activities. Firms should ensure that every activity, business area and management function has a Senior Manager with Overall Responsibility for it.

Other ResponsibilitiesThis section can be used to describe additional responsibilities not otherwise recorded in the SoR for which a senior manager is to be responsible. These responsibilities should be described clearly so that they can be understood by someone who is not familiar with them.

In addition to SoRs, a Responsibilities Map should provide an overview of how a firm is managed, containing key

information about senior management reporting lines and responsibilities. Good responsibilities maps usually have a mixture of graphics and text that make it easy to understand who reports to whom and who is responsible for various business activities.

1.2

FCA issues final rules on new directory

As part of the extension of the Senior Managers and Certifications Regime (SM&CR) to all solo-regulated firms, certain individuals who were previously authorised by the FCA will now need to be assessed as fit and proper by firms and will no longer appear on the Financial Services (FS) Register. To ensure that consumers, firms and other stakeholders continue to be able to find information on key individuals working in financial services, the FCA is introducing a Central Directory. The three broad categories of individuals, referred to as the Directory Persons who will be listed in the Directory are:

• All Certified staff under the SM&CR;

• Executive and non-executive directors who are not performing Senior Manager Functions; and

• Other individuals who are sole traders or appointed representatives where they are undertaking business with clients and require a qualification to do so.

The final rules require firms to report timely and accurate information about their Directory Persons. Firms will need to take all necessary actions to gather the required information and ensure its accuracy prior to submission. Solo-regulated firms can start submitting data as of 9 December 2019, though these submissions must be complete by 9 December 2020. To ensure that the information on the Directory remains up to date firms will

have 7 business days to update information on joiners, leavers and changes in circumstances.

1.3

FCA policy statement on increasing the Financial Ombudsman Service award limit

The Financial Ombudsman Service (FOS) award limit sets the maximum amount of financial compensation that the FOS can require firms to pay when it upholds complaints against them. To ensure more complaints against financial services firms receive fair compensation and to accommodate the extension of FOS access to small and medium sized enterprises, from 1 April 2019 the FOS's £150,000 award limit will change to:

• £350,000 for complaints about acts or omissions by firms on or after 1 April 2019; and

• £160,000 for complaints about acts or omissions by firms before 1 April 2019 and which are referred to the FOS after that date.

Additionally, from 1 April 2020 onwards, both award limits will be automatically adjusted each year to ensure they keep pace with inflation. The reward limit will remain at £150,000 for complaints referred to the FOS before 1 April 2019.

Firms should ensure that consumer facing material is updated before 1 April 2019. Firms must also ensure that they are using the most recent version of the FOS's standard explanatory leaflet and that complaint handling staff are aware of the increased limits.


1.4

FCA report setting out industry insights on cyber security

The FCA has issued an insight report on cyber security, encouraging all firms to consider whether these insights may be useful when considering their own cyber resilience strategies. The insights have been gained from FCA led industry Cyber Coordination Groups (CCGs) and the FCA hopes that some of the following insights will benefit other firms:

Put good governance in place adopting a top-down approach through workshops that increase cyber knowledge and illustrating business specific cyber risks in useful formats will help articulate cyber risk in terms that people understand.

Identify what you need to protect firms should focus on the continuity of critical business functions taking into account who they work with and not only being concerned with suppliers but instead thinking wider about third party risk.

Protect your assets appropriately including cyber security teams in the change management and assurance process helps incorporate cyber resilience at the earliest stage of design, development and system acquisition.

Use good detection systems Identify users with privileged access to critical systems, and review this on a regular basis. Use network behaviour monitors and user behaviour analysis to identify deviations from the expected patterns of activity.

Be ready to respond and recover The ability to respond and recover from incidents should be a key part of a business’s risk management and operational resilience planning.

1.5

FOS correspondence to the Treasury on the treatment of vulnerable customer under the Equality Act 2010

The Treasury has published a letter received from the Financial Ombudsman Service (FOS) regarding its approach to complaints where firms have failed to provide reasonable adjustments to their services and may be in breach of the Equality Act.

Within the letter, Caroline Wayman, Chief Ombudsman and Chief Executive clarifies that where it is relevant to the circumstances of the complaint, the Equality Act will be considered when deciding what is fair and reasonable and if it is deemed that the treatment of a customer has not been fair, then the FOS has the power to direct a firm to put things right; which can include making reasonable adjustments for a customer.

If following on from individual cases the FOS has concerns regarding a firm’s conduct, then they would be likely to refer these to the FCA or the Equality and Human Rights Commission. At the request of the Treasury the FOS has also provided example cases where it has identified unfair treatment and instructed firms to make reasonable adjustments for a customer.

1.6

Findings of phase I of the FCA's digital regulatory reporting pilot

The FCA has published the results of the first phase of its pilot project on Digital Regulatory Reporting (DRR). The 6 month pilot explored how firms and regulators could use technology to make the current process of regulatory reporting more accurate, efficient, and consistent through the development of a prototype system. Phase 1 of the project identified the following considerations:

Converting regulation into code there is no obvious solution to efficiently convert regulatory instructions into code and failing to identify the most efficient method may make the DRR solution unsuitable for some regulatory reporting.

Providing firms’ data to regulators ensuring that the format used to standardise data can be reused across multiple regulatory reports is critical to the efficiency of the DRR solution.

Implementing and adopting DRR there are implicit risks and unknowns in rolling out DRR. Implementation will require changes to the internal technology and processes used by firms and regulators. Any adoption approach must be fair to all industry participants and not just those that participated in the pilot and related events.

The FCA, Bank of England and a group of industry participants will soon commence the second phase of the pilot which will consider the economic viability of DRR and explore its application to different product groups.


1.7

First meeting of FCA and Prudential Regulation Authority Climate Financial Risk Forum

On 8 March 2019, the Prudential Regulation Authority (PRA) and FCA hosted their first Climate Financial Risk Forum (CFRF). The Forum’s objective is to share best practice across the industry that will advance financial sector responses to the financial risks presented by climate change.

The regulators recognise that firms are enhancing their approaches to managing these risks, but face barriers to implementing the forward-looking, strategic approach necessary to minimise the risks. The CFRF aims to reduce these barriers by developing practical tools and approaches to address climate-related financial risks.

At its first meeting, the forum agreed to establish four working groups focusing on risk management, scenario analysis, disclosure, and innovation. Each working group has been tasked with producing practical guidance in their respective areas and final outputs will be shared with industry more widely.

1.8

UK Finance online guide to ethics in banking and finance

UK Finance has launched an online guide to ethics in banking and finance. The guide is primarily aimed at boards, non-executive directors and senior managers, bringing together sources, reference documents and profiling approaches that provide a broad framework for what can be seen as constituting ‘ethics in banking’ across the following four themes:

Leadership, governance, systems and controls considers the key pillars which underpin a firm’s organisational approach and control structure, taking into account relevant legal and regulatory obligations and how these pillars can further ethical objectives and contribute to good outcomes.

Workforceexamines the main stages of an employee’s lifecycle within an organisation, considering relevant legal and regulatory obligations and how a firm’s approach to its workforce can further ethical objectives and contribute to good outcomes.

Customers and conduct of businessexplores the stages of a typical customer lifecycle and considers how a firm’s approach to these stages can further ethical objectives and contribute to good outcomes.

Other stakeholdersconsiders firm’s wider relationships and context within which a firm must undertake its business.


Consumer Credi

2.1

1.1 FCA review of the retained provisions of the Consumer Credit Act

The FCA has reported to the Treasury on its views regarding which of the remaining Consumer Credit Act 1974 (CCA) provisions could be replaced by FCA rules or guidance, without adversely affecting the appropriate degree of protection for consumers. The review has been approached through the following three, inter-linking themes:

Rights and protections This section considers those provisions that either convey a right or provide a protection under the CCA. The FCA’s view is that most of these provisions could not be repealed without adversely affecting the appropriate degree of consumer protection. The FCA has however identified some provisions where adjustments may be necessary to ensure that they balance consumer protection whilst not imposing a disproportionate burden on firms.

Information Requirements This section considers information provisions throughout the lifetime of an agreement and those that are provided on request. The FCA has identified some CCA provisions which could, in principle, be reproduced by FCA rules; however it might not be possible to replicate the linked sanctions provisions, such as unenforceability, as this might reduce the level of consumer protection.

Sanctions The FCA’s view is that it would not be possible to replicate or replace the sanctions of unenforceability under its general rule-making power and these should be retained in legislation. It is however recognised that the application of the current sanctions may be disproportionate due to

complex provisions which are open to interpretation. In this light it proposes that the sanctions could be limited to those cases where there is material harm and suggests that the application of the sanction could be narrowed.

The Treasury will review the report and make a final decision about the future of the retained CCA provisions in light of the FCA’s views and other relevant matters.

2.2

FCA thematic review of the debt management sector

The FCA has published the findings of its thematic review of the debt management sector aimed at testing whether firms within this sector are treating their customers fairly, and delivering appropriate outcomes, particularly for vulnerable customers.

The review considered culture, quality of advice, and the administration of debt management plans and identified the following two areas where firms need to make significant improvements:

• Debt advice given to customers who are seeking help together or who are already on a joint debt management plan. Some firms routinely failed to consider or discuss what debt solutions are available and suitable for each customer individually.

• The identification and treatment of vulnerable customers, including consideration of how an individual’s vulnerability might affect the delivery and suitability of the debt advice and their best interests.

The FCA expects firms to identify and remediate instances of advice or service that fell below the standard expected and are also taking supervisory action where persistent issues have been

identified. An enforcement investigation has been opened for 1 firm.

2.3

FCA letter to firms following a review into credit card fees and charges

As part of a multi-firm review into the administration of credit card fees, the FCA has found that some customers were being charged fees on multiple occasions and sometimes multiple fees in a single billing cycle, suggesting that firms may not be adequately identifying or dealing appropriately with signs of actual or possible financial difficulties.

The review concluded that there are opportunities for firms to improve outcomes for their customers and take appropriate action where customers repeatedly incur fees. In this light the FCA’s letter is asking firms to consider whether their policies and procedures in relation to fees and charges result in fair consumer outcomes and are compliant with the rules and guidance provided in chapter 7 of the Consumer Credit Sourcebook (CONC 7). In particular:

• Consider the scenarios that are currently regarded as signs of actual or possible financial difficulty and whether multiple fees and charges are recognised as one of those signs;

• Identify whether existing systems flag those customers who are repeatedly incurring fees on their account; and

• Review the range of actions that are taken when signs of actual or potential financial difficulty are identified and consider whether these actions ensure that customers are being treated with forbearance and due consideration.


Mortgages

3.1

FCA publishes Mortgage Market Study final report

The FCA has published the final report of its Mortgage Market Study which aimed to understand how well certain aspects of the market are working for consumers. The report sets out the FCA’s findings and proposed remedies for enhancement which include:

Making it easier for consumers to choose the right mortgage The FCA is keen to explore how the market could make information more readily available or engage with new tools that will make it easier for consumers to identify the best product for them. The FCA will continue to seek working group input to identify barriers to lender participation and consider whether any FCA action would be beneficial.

Giving consumers more choice about the support and advice that they need The FCA is committed to identifying changes to advice rules and guidance that would reduce barriers to innovation in mortgage distribution and prevent consumers being channelled unnecessarily into advice. The FCA will consult on specific changes to its advice rules and guidance later in the year.

More help for consumers choosing an intermediaryThe FCA is engaged with the Single Financial Guidance Body (SFGB) on extending its existing directory which helps consumers find a retirement adviser to cover mortgage intermediaries.

Switching: fair treatment for long-standing consumersThe FCA is undertaking further research to better understand the characteristics of those consumers who do not switch. Once complete, the FCA will consider how best to target potential remedies for those customers that would benefit most and will report back on its findings later this year.

Alongside this report the FCA as issued a consultation paper which sets out proposed changes to its responsible lending rules and guidance aimed at helping eligible consumers switch to more affordable mortgage products available in the market.

3.2

FCA consults on changes to its responsible lending rules and guidance

To address concerns that some consumers cannot switch to a more affordable mortgage despite being up-to-date with their mortgage payments, the FCA is consulting on changes to its responsible lending rules which will mean that lenders may enter into a new regulated mortgage contract with an eligible consumer where they can demonstrate that the new mortgage is more affordable than their present one. As part of the consultation the FCA is also seeking views on the following proposals:

• A requirement for inactive lenders and administrators acting for unregulated entities to review their customer books to identify eligible consumers and write to them highlighting this rule change and directing them to relevant sources of information;

• A requirement for mortgage lenders who make use of the modified affordability assessment to disclose to consumers the basis on which their affordability has been assessed and provide some additional disclosures about potential risks; and

• A requirement for mortgage lenders to flag which mortgages have been sold using the modified affordability assessment when submitting Product Sales Data (PSD) reports to the FCA.

The consultation closes on 29 June 2019 and the FCA expects to publish final rules at the end of 2019.


Investments

4.1

FCA publishes the investment platforms market study final report alongside a consultation on remedies

The FCA has published the final report of its investment platforms market study alongside a consultation on remedies describing how it would like to see the investments platforms sector improve. The FCA aims to reduce the barriers that consumers face when switching from one platform to another through a new requirement for platforms to offer retail clients the option of ‘in-specie’ transfers of units in investment funds and restricting the use of exit fees. The consultation period closes 14 June 2019.

The FCA has also emphasised its on-going commitment to improving the switching process across the investments sector making particular

reference to the Transfers and Re-registrations Industry Group (TRIG) framework, highlighting the following areas for improvement:

• Improved standards for transfer and re-registration times from an industry-agreed maximum timescale for each step in the switching process;

• Clearer customer communications from the receiving provider at the start of the switching process, explaining the transfer process, timelines and giving a point of contact for any questions or complaints; and

• Publication of transfer times data so consumers and third parties can compare platform performance.

Since publication of the FCA’s interim report the TRIG has appointed a not-for-profit joint venture ‘STAR’ to

develop and oversee the Framework’s implementation and monitoring.

The FCA is in full support of STAR’s work and will review progress made by the industry later this year and, if needed, again in 2020. The FCA will take further regulatory action if it does not observe more efficient switching or that switching has not become easier for consumers and advisers. This could include revisiting its rules requiring prompt and efficient transfers and sunlight remedies.


Financial Crime

5.1

Treasury Committee report on Economic Crime: Anti-money laundering supervision and sanctions implementation

The Treasury Committee has published a report on Economic Crime relating to Anti-money laundering (AML) supervision and sanctions implementation drawing on the following recommendations aimed at strengthening the UK’s framework:

AML supervision Property transactions and company formation should be subject to more stringent AML requirements to ensure that these channels are not being exploited for illicit transactions.

Sanctions The effectiveness of the Office of Financial Sanctions Implementation (OFSI) has been questioned for not acting as a deterrent to UK based sanctions violations. Public examples of enforcement will be necessary if OFSI is to be recognised as an effective deterrent.

Suspicious Activity Reports (SARs) Those outside of the core financial sector including those involved in property and company formation, should be encouraged to submit more SARs. The system should be as robust and simple to use as possible, ensuring that SARs are high in quality and quantity,

Politically Exposed Persons (PEPs) The Government should create a centralised database of PEPs to make it easier for firms to identify individuals who fall into this category.

Legislative Reform The Government should consider proposals for new legislation to improve the enforcement of corporate liability for economic crime.

5.2

Treasury issues guidance on Counter-Terrorism (Sanctions) (EU Exit) Regulations

This guidance has been issued as required under the Sanctions and Anti-Money Laundering Act 2018. The purpose of the guidance is to give an overview of the requirements in the Regulations and direct readers to the existing and more detailed sanctions guidance published by the Office of Financial Sanctions Implementation (OFSI).


Dates for the diary...

Early 2019 FCA Duty of Care feedback on responses

Spring 2019 FCA Multi-firm work regarding policies towards vulnerable consumers

April 2019 UK is Scheduled to Withdraw from the EU

01 Apr 2019 SME access to FOS implementation deadline

April 2019 FCA Planned thematic work on the treatment of vulnerable consumers

within Non-Bank Lenders

April 2019 FCA Guidance on vulnerability Consultation Paper

13 May 2019 Government responses for implementing the Guardianship Act 2017

30 Sept 2019 EBA guidelines on Outsourcing Arrangements comes into force for new arrangements

29 Aug 2019 PPI Complaints Deadline

09 Dec 2019 SM&CR Implementation deadline

10 Jan 2020 Implementation deadline for the fifth anti-money laundering directive

TBC FCA Retail Banking multi-firm work on access and vulnerability

TBC FCA changes to responsible lending rules and guidance


FCA scheduled reviews...Retail Investments Publication type Complete by

Outcomes testing on auto-advice Review Q4 2018/19

Wholesale Financial Markets Publication type Complete by

LIBOR transition (to SONIA) TBC 2020/21


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The information compiled within this bulletin has been taken mainly from material drawn from the FCA with some other carefully selected sources covering a roundup of relevant market news. We have identified those articles which we feel would be of most interest to Target and the service it provides to existing clients.

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